Banks still have the final say over policy in the EuroZone

From the Independent:

The eurozone is preparing to bow to the will of the financial markets as leaders attempt to ease fears ahead of crucial elections in Greece this weekend.

A draft of the text that will be discussed at the European Union summit later this month was leaked, showing national leaders are set to go ahead with a pan-European banking union and closer integration, the two areas where frightened investors have been clamouring for progress.

“There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance,” said the draft, which was obtained by Reuters.

Investors have been pulling money out of banks in struggling eurozone states in recent months, motivated by fears that their deposits could be devalued if the eurozone breaks up. Figures released by the Greek central bank showed total deposits fell by 17 per cent in 2011. There have also been reports of large withdrawals from the Spanish banking system, for which the Madrid government has requested a bailout of up to €100bn.

Senior European policymakers, including the European Commission President, José Manuel Barroso, have suggested that a move to a banking union, with central guarantees of all deposits, will calm investors. The European Central Bank President, Mario Draghi, has also called for such a union.

However, the leak of the draft yesterday failed to make a positive impression. Spanish 10-year borrowing costs rose again, closing at 6.76 per cent. Italy also faced higher borrowing costs. The country had to pay 3.97 per cent to raise €6.5bn, up from 2.34 per cent last month.

Markets were also unsettled by German Finance Minister, Wolfgang Schäuble, who expressed doubts about Athens’ ability to stick to the savings programme imposed under the EU’s bailout. He was said to have told a meeting of his ruling Christian Democratic Party this week that the “Troika” of EU, European Central Bank and International Monetary Fund officials would soon find out that Greece will not keep to its commitments.

“When the Troika next visits Athens they will see that Greece cannot fulfil the programme,” Die Welt newspaper quoted him as saying. He said that no matter who won Sunday’s election, Athens would not manage to keep to the conditions. Die Zeit newspaper also said Greece was behind schedule on implementing its savings programme and warned Germany might have to consider a third bailout before summer ends.

Ambassadors will discuss the draft summit text today, ahead of the formal meeting in Brussels on 28-29 June. Mr Barroso has said a banking union could be established next year without any new European treaties being required.

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Angela Merkel feels the urgency (Photo credit: Wikipedia)

Germany and European Union officials are urgently exploring ways to rescue Spain’s debt-stricken banks although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wednesday.

Spain, the euro zone’s fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks.

The European Central Bank dashed investors’ hopes of an easing of monetary policy or another flood of cheap liquidity for banks despite saying that the euro zone money market has again become “dysfunctional”. The ECB left interest rates on hold at 1 percent at its monthly meeting.

The move raised pressure on EU political leaders to outline a solution to the bloc’s festering debt crisis at a summit later this month.

Spanish Economy Minister Luis de Guindos said after talks at the European Commission on Wednesday there were no immediate plans to apply for a bailout. Spain would await the results of an IMF report and an independent audit of the banking sector, both due this month, before taking decisions on how to recapitalize the banks, he said.

ECB President Mario Draghi said financial markets were not wrong to be worried about the future of the euro zone but they underestimated the political commitment backing the single currency. He welcomed EU leaders’ agreement to step up work on a long-term vision for a full economic and monetary union.

“Some of the problems in the euro area have nothing to do with monetary policy,” he told a news conference. “I don’t think it is right for monetary policy to fill other institutions’ lack of action.”

Acknowledging that the rate-setting governing council’s decision was not unanimous, he said “a few members, I would say not many” had wanted a rate cut on Wednesday.

Asked whether the central bank would take supportive action if the EU summit agreed to move towards a fiscal and banking union, he said there was no such “horse-trading” but the ECB would monitor developments and stood ready to act.

Read more at Reuters…

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